Chapter 1

Question 1

What is risk management?

Answer 1

Risk measurement and the means of attempting to deal with the risks we face are collectively termed risk management.

Question 2

Definition of risk?

Answer 2

• possibility of an unfortunate occurrence
• doubt concerning outcome of a situation
• possibility of a loss
• not every type of risk is insurable

Question 3

Is it possible to insure (transfer) the risk?

Answer 3

• Yes the owner pays a known premium to an insurer in return for the insurer accepting the future unknown cost of the insured risk.
• This is done by the insurer promising to pay for loss, damage or liability as defined by policy terms.
• Insurance is therefore a means of transferring risk

Question 4

What is risk transfer?

Answer 4

-brings peace of mind to the insured because they agree to replace the uncertainty of possible future loss with the certainty of an agreed premium.

Question 5

Risk seeking?

Answer 5

-People who are willing to carry certain risks themselves

Question 6

Risk averse?

Answer 6

-People who feel happier minimising the risk they are exposed to ( eg by transferring the risk, insurance)

Question 7

Risk management?

Answer 7

• appointment of risk managers in industry is now commonplace.
• many are members of the Association of Insurance and Risk Managers in Industry and Commerce (Airmic)
• organisation sets standards in areas of risk management and has published a risk management standard that has been widely adopted.
• good risk management is the identification and treatment of defined risks and should be a continuous and developing process embedded in a firms strategy.
• should address all the risks surrounding the firms current, past and future activities.

Question 8

Commercial risk management?

Answer 8

• commercial organisations take a more analytical view when deciding what to insure.
• a strategy that businesses use to manage their assets, minimise liabilities etc.
• CRM is important for a number of reasons; reduces potential for a loss by identifying and managing hazards, shareholders have a greater degree of confidence in company’s ability to manage risks and it provides a disciplined approach to quantifying risks.

Question 9

3 key steps in risk management process;

RISK IDENTIFICATION

Answer 9

• discovering threats that may already exist, potential threats that may exist in the future.
• not always insurable but risks must be managed
• for example a business can put money aside in case of an emergency to manage their risks
• conventional risk, insurer may get involved to identify potential risks by carrying out survey or examination.
• insurers also play a role in relation to risk control when they provide reports following the survey.

Question 10

RISK ANALYSIS;

Answer 10

• Risk managers examine past data to analyse risk.
• Eg they can look at how many motor accidents involved drivers under 25 and can predict what is likely to happen to future drivers who fall into this category.
• these can be analysed for future trends
• insurers will look at the same elements when considering rating of a risk.

Question 11

RISK CONTROL;

Answer 11

• if the risk is seen to have potential for adverse consequences then some course of action should be put in place to try eliminate or reduce that risk
• elimination of risk or reduction will be subject to the test of the whether the cost of doing so is reasonable compared to the cost of the event occurring.

Question 12

Different aspects to the controlling of risk;

Answer 12

• Physical control measures; eg put locks on doors to reduce theft risk
• Financial control measures; transfer the risk by taking out insurance
• Developing a good risk culture; educate employees or how to avoid or reduce risks.

Question 13

Internal controls;

Answer 13

• Detective controls; detect errors or irregularities that may have occurred.
• Corrective controls; correct errors or irregularities that have been detected
• Preventative controls; keep errors or irregularities from occurring in the first place.

Question 14

Fraud

Answer 14

• key risk that insurers need to manage and mitigate
• resulted in the creation of various industry bodies and databases to detect fraudulent activity.
• the register records all details and if and when a new claim comes in it will match it to any previous claims that may have come in from that claimant

Question 15

Components of risk;

UNCERTAINTY

Answer 15

• uncertainty about the future is the centre of risk

- because we don’t know what is going to happen we cannot be certain about anything

Question 16

Level of risk;

Answer 16

• risk is assessed by insurers in terms of frequency (how often something might happen) and severity (how costly it would be if it did happen)
• F & S both part of risk assessment, relationship varies between them.

Question 17

Peril and Hazard;

Answer 17

• relates to the cause of losses
• Peril; gives rise to a loss
• Hazard; influences the operation or effect of the peril

Question 18

Physical and moral hazard;

Answer 18

• relates to physical characteristic of risk and includes any measurable dimension of risk.
• arises from attitude and behaviour of people, usually the conduct of the insured, can also arise from the insureds employees.

Question 19

Categories of risk;
FINANCIAL RISKS;
BENEFIT POLICIES

Answer 19

• for a risk to be insurable it must be measurable in financial terms
• most insurances are compulsory in nature
• this means the value placed on the loss is not determined in advance
• benefit policies, cannot be valued precisely and so policies are taken out with pre agreed amounts in the event of an accident or sickness

Question 20

PURE RISK;

Answer 20

• Pure risks, possibility of a loss but not a gain- best achievable object is a break even situation.
• For example; travelling home in a car, we can hope for a safe arrival however the possibility exists that there might be an accident.
• These types of risk are generally insurable.

Question 21

PARTICULAR RISKS;

Answer 21

• Localised or personal in their cause and effect.

- Sometimes cause may be widespread but effect is localised eg a storm.

Question 22

Features of insurable risks;

Answer 22

• A fortuitous event (accidental or unexpected)
• Insurable interest present, legally recognised financial relationship between insured and object that is being insured.
• Not against public policy, commonly recognized in law that contracts must not be against public policy or go against what society considers to be the moral right thing to do.

Question 23

HOMOGENOUS EXPOSURES;

Answer 23

• sufficient number of exposures to similar risks known as homogenous exposures
• insurer can forecast the expected frequency and likely event of losses
• use the law of large numbers- theory that predictions become more accurate as the base of data increases in size.
• larger amount of homogenous exposures, makes the task more difficult as patterns more difficult to determine.